Share Repurchases

[Cigarbutt]

...the situation can be approached & looked at from several angles.

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I have read that particular blog post by The Brooklyn Investor...

I've also spent time on that aspect in order to better understand capital allocation decisions at BRK and also to try to adapt the model for individual asset allocation. An interesting feature (angle) is looking at scenarios (potential equity or whole companies opportunities) and see if the 80% 'coverage' is a floor. I don't think it is if one goes back in time (earlier days of BRK). However, from a humble perspective, the most striking feature is the relative level of fixed income exposure:

 

                                        AR 1998 (B)                                  Q2 2019 (B)

 

cash and equiv. +ST              13.6 (3.8 in 1999)                        122.4                             

fixed income                          21.2                                            20.0

equity inv.                              39.8                                            200.5 (without KHC)                           

total SE                                  57.4                                            386.4 (and we know IV/BV has increased)

 

You can skip the next section about bladder physiology if interdisciplinary thinking is not your thing although your prostate may eventually urge you to think about it at some point. The full bladder analogy is classic Buffett and underlines the temperamental aspect of the investment equation. The bladder, as it fills, contains intrinsic and primitive pathways that automatically react to the pressure rising and, absent a conscious and learnt reflex, would result in immediate voiding. Also, the pressure/volume curve is not linear and is quite dynamic with pressure dropping off with adaptation within a certain range (we've all experienced the disappearing urge feeling, given a certain level of patience). I guess the present pseudo-buyback stance may incorporate here with the concept. However, since temperamental decisons are (almost?) always rationally based for the Master, there is an upper limit when the bladder pressure adaptation mechanism does not work anymore as the pressure curve goes quasi-vertical when a specific volume is reached and that may correspond to the self-imposed 150B limit.

 

 

 

[Guest longinvestor]

...the situation can be approached & looked at from several angles.

- - - o 0 o - - -

I have read that particular blog post by The Brooklyn Investor...

I've also spent time on that aspect in order to better understand capital allocation decisions at BRK and also to try to adapt the model for individual asset allocation. An interesting feature (angle) is looking at scenarios (potential equity or whole companies opportunities) and see if the 80% 'coverage' is a floor. I don't think it is if one goes back in time (earlier days of BRK). However, from a humble perspective, the most striking feature is the relative level of fixed income exposure:

 

                                        AR 1998 (B)                                  Q2 2019 (B)

 

cash and equiv. +ST              13.6 (3.8 in 1999)                        122.4                             

fixed income                          21.2                                            20.0

equity inv.                              39.8                                            200.5 (without KHC)                           

total SE                                  57.4                                            386.4 (and we know IV/BV has increased)

 

You can skip the next section about bladder physiology if interdisciplinary thinking is not your thing although your prostate may eventually urge you to think about it at some point. The full bladder analogy is classic Buffett and underlines the temperamental aspect of the investment equation. The bladder, as it fills, contains intrinsic and primitive pathways that automatically react to the pressure rising and, absent a conscious and learnt reflex, would result in immediate voiding. Also, the pressure/volume curve is not linear and is quite dynamic with pressure dropping off with adaptation within a certain range (we've all experienced the disappearing urge feeling, given a certain level of patience). I guess the present pseudo-buyback stance may incorporate here with the concept. However, since temperamental decisons are (almost?) always rationally based for the Master, there is an upper limit when the bladder pressure adaptation mechanism does not work anymore as the pressure curve goes quasi-vertical when a specific volume is reached and that may correspond to the self-imposed 150B limit.

 

lol..nice drill down of bladder relief. It’s said that such relief brings on a level of bliss next only to orgasm among all human experience Of course it lasts only a few moments.

 

Coming back to buybacks Buffett is wary that the next guy may give in far easier to the urge.

[John Hjorth]

Thank you for your post, Cigarbutt,

 

My immediate reaction to your numbers : 0_0. I've actually never paid any real attention to that part of Berkshire's securities portfolio, nor the size of that particular part of it.

 

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Then [- naturally! - ] some basic numbers digging :

 

Berkshire "bond portfolio" [called in the financials : "Investments in fixed maturity securities"] :

 

[All figures in USD B]

 

EOP2019Q2 : 19.962

EOP2018Q4 : 19.898

EOP2017Q4 : 21.353

EOP2016Q4 : 23.432

 

- - - [Here I'm inserting a dotted line, because the accounting definition for this part of the portfolio was changed between EOP2015Q4 and EOP2016Q4]^[1] ---

 

EOP2015Q4 : 25,998

EOP2014Q4 : 27.397

EOP2013Q4 : 28.785

EOP2012Q4 : 31.449

EOP2011Q4 : 31.222

EOP2010Q4 : 33.803

EOP2009Q4 : 35.729

EOP2008Q4 : 27.115

EOP2007Q4 : 28.515

EOP2006Q4 : 25.300

EOP2005Q4 : 27.420

 

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There is no practical way to adjust EOP2005Q4 - EOP2015Q4 figures to figures based on principles for the following period, based on [for us] available information.

 

It looks more to me like Cigarbutt here has been hinting, implying, or perhaps even suggesting : "It's not about a ""min. USD 20 B in cash & cash equivalents" Berkshire contingency liquidity rule", more like a ""min. USD 20 B in cash & cash equivalents AND USD ~20 B in bonds all times" Berkshire contingency liquidity rule".

 

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Note 1 :

 

Before [somewhere] between EOP2015Q4 and EOP2016Q4 :

 

US T-Bills could be part of :

 

a. Cash and cash equivalents [if maturities was less than three months when purchased.

b. Investments in fixed maturity securities. [Here understood as "total value of US T-Bills minus [a]"].

 

After [somewhere] between EOP2015Q4 and EOP2016Q4 :

 

US T-Bills could be part of :

 

c. Cash and cash equivalents [if maturities was less than three months when purchased.

d. Short term investments in US T-bills ["short term" is here defined in US GAAP and IFRS as "with maturity within one year after the balance sheet date".

e. Investments in fixed maturity securities. [Here understood as "total value of US T-Bills minus [c] - [d]"].

[Dynamic]

I think this long view may be telling with regard to the evolution of the insurance side of Berkshire.

 

I think the continual approximation of about $20bn needing to be kept available to pay for correlated risks (e.g catastrophe losses) that has remained at around that level for so long, despite Berkshire's admirable conservatism, reflects how much Berkshire has shifted its insurance business's relative focus away from megacatastrophe reinsurance, and reflects the increase in auto insurance and long-tail insurance exposures over time, along with specialty insurance, while the megacats remain roughly constant.

 

I imagine that if the prices for catastrophe cover were to harden, which might well happen AFTER a major loss event where the industry suffers severe losses and needs to rebuild reserves and limit risks, Berkshire could easily write a LOT more profitable business (while still taking a good deal of care to limit correlated risks, e.g. exposure to single events to a manageable level), but it's now so much bigger, and with so much more income from subsidiaries, that it could easily raise that manageable level substantially to take advantage of adequate pricing and double or triple its megacat exposure.

 

The great thing is that, as ever, the incentive structure maintained in Berkshire's insurance subs is all about maintaining conservative underwriting and rewarding that first and foremost, rather than rewarding volume of business written regardless of price.

[Guest longinvestor]

I think this long view may be telling with regard to the evolution of the insurance side of Berkshire.

 

The great thing is that, as ever, the incentive structure maintained in Berkshire's insurance subs is all about maintaining conservative underwriting and rewarding that first and foremost, rather than rewarding volume of business written regardless of price.

 

+1 I too think so. There’s likely plenty of opportunities down the road. How many competitors chase volume? They must! Clearly amongst all subs, insurance stands to prosper the most under the Berkshire umbrella. While they wait for the opportunities to deploy capital they’re planting organic seeds like Specialty and Three. Insurance makes up the largest understatement of value to shareholders. While the silly syllabus rages on as to how to account for the float.

[Guest longinvestor]

Insurance $aved their a$$ during the 1960’s, 70’s. The $8.6 Million into NICO was juiced out of the textile business! Textiles, retail, blue chip stamps all of which went bust in due course. It’s a far cry today, energy, railroad etc. can hardly be described in the same terms. They can put $100’s of billions to work, let’s see if Jain and his troops do so. The contrast of quality between 1970 and 2020 couldn’t be more stark. All good, but for the stock price. There’s a plan for that too!

[John Hjorth]

The Berkshire A & B shares - bought back since the implementation of "structured" buyback programmes [first max. 1.1 x BV, next max. 1.2 X BV, then [& now] "Mr. Buffett & Mr. Munger decide"] - are they retired? [or are they held in treasury, and thereby constituting potential acquisition capacity [dry powder]]? [Not that I think this would take place at the recent market price levels.]

[AdjustedEarnings]

The Berkshire A & B shares - bought back since the implementation of "structured" buyback programmes [first max. 1.1 x BV, next max. 1.2 X BV, then [& now] "Mr. Buffett & Mr. Munger decide"] - are they retired? [or are they held in treasury, and thereby constituting potential acquisition capacity [dry powder]]? [Not that I think this would take place at the recent market price levels.]

 

Retiring/canceling shares is merely a procedural matter. It will not make any difference to how much stock they can issue in an acquisition. At this price, I don't think a stock acquisition is a possibility because sellers don't impute value to an undervalued stock (and so they don't accept a lower multiple). Nor is a stock transaction necessary, given the issue we're discussing here being too much cash.

[gfp]

The Berkshire A & B shares - bought back since the implementation of "structured" buyback programmes [first max. 1.1 x BV, next max. 1.2 X BV, then [& now] "Mr. Buffett & Mr. Munger decide"] - are they retired? [or are they held in treasury, and thereby constituting potential acquisition capacity [dry powder]]? [Not that I think this would take place at the recent market price levels.]

 

Treasury stock, at cost

 

(5,242)

 

They are treasury shares at the moment.  No big difference as mentioned above

[omagh]

https://www.morningstar.com/articles/942242/5-reasons-to-consider-buying-berkshire-hathaway?dtr

 

Berkshire Is Undervalued

Fifth, Berkshire’s shares are undervalued in a market that is nearly fairly valued. At today’s prices, Berkshire is trading at 79% of our fair value estimates of $380,000 (Class A) and $253 (Class B), relative to the universe of stocks we cover at 96%, implying a solid double-digit gain for Berkshire’s shares should they reach our fair value estimate. On a price/book basis, the shares are currently trading at 1.28 times second-quarter book value per share and 1.20 and 1.10 times our estimates of book value per share at the end of 2019 and 2020, respectively. We believe that Buffett’s willingness to buy back shares at prices between 1.2 and 1.4 times book value per share (and more aggressively below 1.3 times) should help to provide a bit of a floor for the stock in the near to medium term.

[Viking]

Omagh, thanks for posting the BRK summary from Morningstar. Below $200 it certainly looks like a reasonable buy. It will be interesting to see what Buffett does if the share price falls into the $180’s should we see more selling in the overall market due to economic weakness.

 

Key weakness: a large chunk of the businesses are cyclical (railraod, banking etc) which will slow if the economy slows

 

Important question: how will large drop in bond yields affect the large insurance business. Perhaps this will affect competitors more (who rely on bond yields more than BRK does in their investment portfolio). How Buffett invests the insurance float (equities) may prove to be an advantage versus competitors if bond yields continue to move lower.

[omagh]

Agree on the competitors.  They have an immediate windfall from cap gains on their bond portfolios, but will be hard-pressed to fund their future insurance liabilities.  I'm in the process of selling down a long-held stake in WR Berkley as it has become inflated at $13.2B market cap on $6B book value.  It has limited upside from here, mostly relying on continued BV multiple expansion.  As my general rule, 2xBV is an expensive proposition for an insurance company.  At this point, I'd rather pay the cap gain taxes and hold cash than hold the shares through a downturn and watch the multiple collapse back to 1xBV.  It will be easier to put money to work at high rates in the future.

 

At this point, I'm only holding BRK in the insurance space.  Buffett has done a tremendous job of building a float machine.  Chris Bloomstran at Semper Augustus has a wonderful write-up on how the energy business and the railroad business are able to generate further ways to use insurance float through accelerated depreciation accounting rules.  Even if the railroad business isn't throwing off cash due to cyclicality of the overall economy, Buffett will still be able to run insurance operating profits and cap gains through the railroad business' accelerated depreciation shield.

 

- O

Important question: how will large drop in bond yields affect the large insurance business. Perhaps this will affect competitors more (who rely on bond yields more than BRK does in their investment portfolio). How Buffett invests the insurance float (equities) may prove to be an advantage versus competitors if bond yields continue to move lower.

[John Hjorth]

Retiring/canceling shares is merely a procedural matter. It will not make any difference to how much stock they can issue in an acquisition. At this price, I don't think a stock acquisition is a possibility because sellers don't impute value to an undervalued stock (and so they don't accept a lower multiple). Nor is a stock transaction necessary, given the issue we're discussing here being too much cash.

Treasury stock, at cost

 

(5,242)

 

They are treasury shares at the moment.  No big difference as mentioned above.

 

Thank you, AdjustedEarnings & gfp,

 

In short, I prefer to ask here when in doubt instead of making implicit personal assumptions [, that may be wrong]. [i will late forget what I've learned from the discussions about SEC filings and US capital market law in the "Could Berkshire tender stock?" topic started by alwaysinvert.] Company law, capital market law and regulations of filings with the stock exchange works in a very different way in my home country with regard to share buybacks.

 

Yes, the question was highly hypothetical, given the actual circumstances on overall basis right now. Thanks.

[John Hjorth]

Posted by CorpRaider in the "Semper Augustus letter" topic here in the Berskshire forum here on CoBF :

 

I feel like CAPE without all these Seigel adjustments picks a lot of that up too (for macro purposes).  Like, Jeremy...they don't need any help inflating earnings bro...incentives matter.  "Yeah everyone dumped in huge losses in 2008, so let's exclude that...no, let's not do that mmmmkay?"

 

Going to look at the longer stuff to see what he says/thinks about float.  i.e. if the longer-term recent run rate BRK ROE is 10% what about the float/holdco leverage (that's kind of what I've been thinking).

 

I'm sorry for double posting. Has the structural situation of Berkshire Hathaway, - the parent - ever been discussed or analyzed here on CoBF? I haven't been able to find something so far.